I wrote before about the faulty analysis by two Harvard economists Carmen Reinhart and Kenneth Rogoff that asserted that when the debt-to-GDP ratio reached a critical point of 90% in a country, the rate of economic growth took a nose-dive and went into negative territory. This analysis was used to spook policymakers, especially in the US and Europe, that bringing deficits under control was the most urgent priority, and that taking measures to stimulate growth and create jobs was the wrong approach. Governments went on an austerity spree, resulting in many people being thrown out of work and social services cut, casuing immense hardship.
Needless to say, members of the oligarchy who want the government to cut spending and use the savings to give tax cuts to the wealthy were thrilled. Pete Petersen is a billionaire who has spent vast sums of his money to push for cuts in earned benefits programs like Social Security, Medicare, and Medicaid and he has become a major figure in advancing this agenda. He seized upon this study as evidence of the rightness of his position.
I thought he was just opportunistically seizing upon it because it suited his purposes. But it turns out that there are close links between Petersen and the two economists. This article looks at Petersen’s large role in the debate and his ties with them.
Reinhart, described glowingly by the New York Times as “the most influential female economist in the world,” was a Senior Fellow at the Peterson Institute for International Economics founded, chaired, and funded by Peterson. Reinhart is listed as participating in many Peterson Institute events, such as their 2012 fiscal summit along with Paul Ryan, Alan Simpson, and Tim Geithner, and numerous other Peterson lectures and events available on YouTube. She is married to economist and author Vincent Reinhart, who does similar work for the American Enterprise Institute, also funded by the Peterson Foundation.
Kenneth Rogoff is listed on the Advisory Board of the Peterson Institute. The Peterson Institute bankrolled and published a 2011 Rogoff-Reinhart book-length collaboration, “A Decade of Debt,” where the authors apparently used the same flawed data to reach many of the same conclusions and warn ominously of a “debt burden” stretching into 2017 that “will weigh heavily on the public policy agenda of numerous advanced economies and global financial markets for some time to come.” (Note that not everyone associated with the Institute touts the Peterson party line.)
The excellent documentary Inside Job that I reviewed here highlighted the problem of academic economists who give a cover of respectability to the operations of the big financial institutions by treating their shady operations as if they were legitimate, thus helping to set the stage for the financial meltdown in 2008. Reinhart and Rogoff look like another example of the unhealthy closeness between academics and big financial interests.
Stephen Colbert devoted quite a bit of time to examine the Reinhart-Rogoff debacle. He clearly shows how their faulty analysis was used by politicians in Europe and the US to push the oligarchy’s agenda. He is accurate in his analysis while being bitingly funny. It is one of his best bits.
Colbert also interviewed graduate student Thomas Herndon of the University of Massachusetts, Amherst who was the one who found all the flaws in the analysis. Herndon explained how it came about.
(These clips appeared on April 23, 2013. To get suggestions on how to view clips of The Daily Show and The Colbert Report outside the US, please see this earlier post.)
It was interesting that when other economists who were not able to replicate the results of Reinhart and Rogoff asked to see the spreadsheets that contained their analysis, their requests were turned down. But when Herndon, who was enrolled in a course that required students to do a term paper that replicated other people’s papers, also failed in this task and asked for access, they granted it to him. Perhaps they felt that a mere graduate student was no threat to them. This whole episode illustrates the importance of transparency in academic work. You have to give other people enough information to enable them to check your work.
What I learned that was new from the Colbert segment was that the Reinhart-Rogoff paper was never subjected to peer-review. It was what is called a ‘working paper’, circulated among peers and not published in a journal. Why would such an unchecked document have such clout? Because it said what powerful people wanted to hear.
Will this revelation change anything? I don’t think so. When you have the oligarchy and its media lackeys and servants in the political and academic classes strongly pushing an agenda, they do not let facts get in the way. Reinhart and Rogoff were useful to the oligarchy in getting this train going. Now that it is barreling along, their shoddy work will be ignored and new reasons will be concocted to justify the same policies.
And you can be sure that Reinhart and Rogoff, like all the academic economists who enabled the big financial institutions to swindle so many people, will continue to be treated like credible experts and continue to prosper. They may be scorned in private by their peers but they will continue to be interviewed by the media, appear at quasi-political events, and be trotted out as experts when needed. If you have a good academic pedigree and say things that are pleasing to the ears of the powers that be, you can do no wrong, just like the way that none of the major players in the financial debacle have faced even the remotest threat of going to jail for their role in the many frauds. That’s how this corrupt system works.